Advance Auto Parts today announced its financial results for the second quarter ended July 15, 2017. Second quarter GAAP earnings per diluted share (diluted EPS) were $1.17. Second quarter adjusted earnings per diluted share (adjusted EPS) were $1.58, which excludes $0.41 of non-GAAP adjustments.
“We delivered sales growth and continued to close the comp sales performance gap versus the industry in Q2 while more than doubling year to date free cash flow. Our revised guidance for the year incorporates the impact of industry headwinds in the first half, which we expect to continue in the second half of the year and we are taking the appropriate actions to adapt to this environment. We’ve now assembled a world class leadership team that is executing our transformation plan to significantly drive growth and long term shareholder value,” said Tom Greco, President and Chief Executive Officer.
Second quarter 2017 highlights
Total sales for second quarter came in at $2.26 billion, a 0.3% increase vs. the prior year period. Comparable store sales for the quarter were flat.
The company's gross profit margin decreased 91 basis points year over year to 43.9%. The decline was primarily driven by the non-cash accounting impact of the planned inventory reduction as well as the increase in supply chain costs, unfavorable mix and commodity headwinds. These factors were partially offset by the company’s efforts to drive favorable material cost performance. The non-cash accounting impact of the year over year inventory reduction was 26 basis points in Q2. Excluding the non-cash accounting impact of the inventory reduction, the company’s gross profit margin decreased 65 basis points year over year.
The company has purchased inventory at higher costs in the past, which are reflected in the balance sheet on a LIFO basis. In addition, under accounting rules certain supply chain costs associated with inventory have been capitalized.
As the company reduced the inventory, these costs moved from the balance sheet and generated a non-cash negative impact to gross margin. As the company continues to reduce inventory, it will improve cash flow, but there will continue to be a non-cash negative impact to gross margin.
Adjusted SG&A was 35.2% of sales, a 123 basis point increase year over year. The increase was primarily driven by investments in customer focused strategies. In addition, higher medical and insurance expenses and support center costs related to increased personnel costs also contributed to the increase. The company's GAAP SG&A increased 222 basis points versus the prior year.
The company's adjusted operating Income of $195.5M (8.6% margin) declined 214 basis points versus prior year, primarily driven by the declines in gross profit and SG&A factors described above. Excluding the non-cash impact of the inventory reduction the adjusted operating income would have been $207.3M (9.2% margin), a decline of 188 basis points on a year over year basis. On a GAAP basis, the company's operating Income declined 312 basis points.
Operating cash flow increased approximately 28.3% to $267.3 million through the second quarter of 2017 from $208.4 million through the second quarter of 2016. Free cash flow was $145.0 million through the second quarter of 2017 compared to $70.5 million through the second quarter of 2016 primarily driven by inventory reduction efforts.
2017 annual outlook
The company expects to continue reducing inventory levels to improve cash flow, and therefore expects to experience the associated non-cash accounting gross margin headwinds. Excluding the non-cash impact of the year over year inventory reduction, which is estimated to be 75 basis points, the year over year reduction on Adjusted Operating income rate is expected be 125 basis points to 225 basis points.
Dividend
On August 10, 2017, the company's Board of Directors declared a regular quarterly cash dividend of $0.06 per share to be paid on October 6, 2017 to stockholders of record as of September 22, 2017.
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